Dragons

Made in China. A term associated with cheaper products made thanks to cheaper labour costs, perhaps at the expense of quality. But the idea that low cost equals low quality is one that many have argued is incorrectly held in the Western mindset. 

The same can be said of the companies behind these products. Chinese stocks listed in the U.S. could be the high quality stocks trading at a discount that appeal to the bargain-hunting investor.

The valuation differential between US tech stocks and their Chinese counterparts drives this point home. Based on enterprise value to EBITDA, Chinese tech stocks are trading at a 70-80% discount, meaning investors are willing to pay four times as much for US tech. 

And while it was a tumultuous start to 2024, things have turned around for Chinese equities. The Shanghai Shenzhen CSI 300 Index soared 9.1% on 30 September – its largest single-day gain since 2008 – after the government unveiled a series of stimulus measures, including rate cuts to support the country’s property market (which has been on shaky ground since Evergrande Group’s default in 2021).

The trading frenzy was put on hold when Chinese indices were effectively forced into a seven-day break for the country’s ‘golden week’ national holiday. Things picked up where they left off when markets reopened on Tuesday – the CSI 300 soared 11% – but had fizzled out later in the day when an update on stimulus measures disappointed investors.

Some Chinese heavyweights that are dual-listed in the U.S. saw their performance on par with some of the biggest hitters on the S&P 500 and Nasdaq. For instance, Alibaba ($BABA) rallied 44% in the last month alone, while JD.com ($JD) soared 81% over the same period.

Alibaba and JD.com are China’s answer to Amazon ($AMZN). In fact, the two Chinese e-commerce giants far outpace Amazon’s annual active users, and have strong balance sheets to match. JD has 62.5% of its US$42b market cap in cash, while Alibaba has 40% of its US$200b market cap in cash. Comparatively, Amazon’s cash as a percentage of market cap stands at just 7.2%.

But there’s a new king of Chinese e-commerce – PDD Holdings ($PDD). If the name doesn’t ring a bell, maybe its subsidiary Temu (and its cleverly targeted ads) will. The online retailer has overtaken Alibaba for the top spot, with net income up 246% in the March quarter, and Temu accounting for half the total revenue. 

Outside of e-commerce, Shenzhen-based behemoth Tencent ($TCEHY) is an undisputed leader in gaming and social media. The US$439b giant, which owns WeChat and League of Legends, saw its net profit margin increase to 32% last quarter. 

A lesser-known fact is that Tencent actually had a hand in PDD dethroning Alibaba. After trying unsuccessfully to compete with Alibaba in the e-commerce field, Tencent resorted to blocking all WeChat links to the online marketplace. Later, Tencent would invest in PDD and give it free reign to access the 900 million monthly active users on WeChat. 

Then, there’s Baidu ($BIDU), the Chinese-equivalent to Alphabet’s ($GOOG) Google search engine. It was the first Chinese company to be included in the Nasdaq-100 index in 2007, but it's grown into far more than its page-ranking algorithm. Baidu has developed a self-driving Robocar and ‘Ernie’ – an AI chatbot to rival ChatGPT.

Baidu, Alibaba and Tencent are also members of the ‘BAT’ club – China’s tech giants that appear more involved in the battle against each other than big tech in the U.S. In terms of performance, Chinese tech stocks have been hit hard in recent years on the back of weak economic data and trade tensions. Meanwhile, U.S. tech has charged ahead, albeit with a few bumps along the road. 

For some investors, Chinese tech stocks may present an opportunity to bet on companies with strong cash positions as they expand their global presence. Ultimately, the trajectory of these stock prices will likely depend on the macro picture. And the year of the Dragon? It may well become a landmark chapter for Chinese equities.